Inter-Generational Planning

The long-range view must account for family longevity

by Herbert K. Daroff, J.D., CFP

Mr. Daroff, a contributing editor for L&H Advisor Magazine, is affiliated with Baystate Financial Planning, in Boston. Connect with him through e-mail: Visit


I start every financial plan with a family tree (see below). Today, most are at least three generations.
We may open our engagement with GEN 1, 2, or 3. Regardless of where we start, there are a number of issues that positively or negatively affect the other generations.

Questions for grandchildren (GEN 3)

How can you start your own financial future when you have so much debt (student loans) already?
There are firms that specialize in consolidating student loan debt. I have found that the family tree is one of the best places to find answers.

  • First, identify the terms (interest rate and duration) for all of the debt
  • Second, determine if parents and/or grandparents have cash in the bank, money markets, CDs, etc. earning substantially less in interest than their grandchild is paying.

Look to swap the debt. “Grandma, I’ll pay you 2% instead of the one-half of one percent you are earning now and instead of the 4-6% that I am currently paying.” And, maybe, parents or grandparents are willing to forgive the interest and/or the principal and make a gift today.

While we are on GEN 3, if they are age 18 or older, make sure that each of them has a Health Care Proxy (called other things in other states, such as Health Care Declaration, Durable Power for Healthcare, etc.) and Durable Powers of Attorney.

Questions for children (GEN 2)

This is the “tweener” generation. Just as kids are going to college or just completing college, their parents are heading toward nursing homes.

Will you be a positive or negative influence on your children’s financial plan?
POSITIVE (maybe?) – You will receive an inheritance. But, we ask parents, how much of your estate will:

  • HELP your children (and grandchildren)?
  • HURT your children (and grandchildren)? – that’s the “maybe”
  • HELP your community (charitable planning)?
  • HELP your government (taxes) – We believe that the government needs the money. We just want their share to be paid by other advisors’ clients, not ours.

In order to address these concerns, we demonstrate that a Family Trust is a great asset protection trust (third party trust created by parents to protect their spouse and descendants). The Family Trust is like:

  • Building castle walls around your assets
  • Digging a moat around the castle walls and filling the moat with rabid alligators
  • Putting up a barbed wire fence and then electrifying the fence

However, most Family Trusts then open up the drawbridge at specified ages and allow the marauding creditors in. Instead, we ask, “Should your Family Trust be a Family Bank instead?”
Family bank language continues the creditor protection by retaining the assets in trust, even if your children are the trustees, but giving the trustee the power to

  • Distribute or loan
  • Some, all, or none
  • If the income and/or principal
  • To or for the benefit of your spouse and descendants, and maybe your parents, too

Take advantage of generation skipping. Why pay estate taxes (even if only to the State) in every generation when you don’t have to?

If your parents are in a lower income tax bracket than you are, you may be able to distribute some of your investment income (K-1 from S-Corporations and LLCs).


The federal gift exemption for 2015 is $5,430,000. As a result, John (based on our family tree) could establish an intentionally non-grantor irrevocable trust with his spouse (Abigail), her parents (Thomas and Martha Jefferson), and his descendants (Quincy and Samuel) as beneficiaries. John could gift some or all of his S-Corp stock or LLC member interests to the trust and/or to Abigail. Abigail could also establish a non-reciprocal trust for the benefit of John, her parents, and her descendants. The trustee would be empowered to “spray” income under the Family Bank provisions to or for the benefit of any family members who are in lower income tax brackets. The beneficiaries are responsible for paying the income taxes, not the grantor or the trust.

In that manner, a grandparent, using the parents’ income, could fund the grandchildren’s education expenses. It may take the parent $100,000 or more in order to net the $60,000 net after taxes needed for tuition. It may take the grandparent, in a lower income tax bracket, only $80,000 or less to net the same $60,000. The same would apply if GEN 2 was making gifts to GEN 3 to help pay off student loans or making gifts to GEN 1 to help them financially. Why pay those non-deductible expenses in the highest tax bracket on the family tree?

most Family Trusts then open up the drawbridge at specified ages and allow the marauding creditors in. Instead, we ask, “Should your Family Trust be a Family Bank instead?

NEGATIVE – You may be called upon to provide custodial care for your parents as care provider and/or financially.
We like to ask, “How much financial support wil you get from your siblings for your parents’ (or from your spouse’s siblings for his or her parents’) custodial care? This is a WIN:WIN question.

  • If they answer, “No problem, my brother (or sister) just took his (or her) company public.” That’s a referral.
  • If they laugh, that tees up the long-term care conversation for them and their parents. It should also serve to introduce you to their parents, with asset to invest along with other planning opportunities. So, that’s a referral, too.

Questions for parents (GEN 1)

How would you feel if your son or daughter got divorced and your future ex-son-in-law or ex-daughter-in-law took some of the assets you left for your child?
That question also leads to the Family Bank conversation.
What happens if your client (not their children) gets divorced?
Remember the old riddle, “What weighs more a pound of bricks or a pound of feathers?” They both weigh the same. Both weigh one pound.

However, which is worth more:

  • $1,000,000 of retirement accounts
  • $1,000,000 of highly appreciated stocks (and/or real estate) with low cost basis – differs depending on whether publicly traded or the client’s own private business
  • $1,000,000 of cash
  • $1,000,000 house – differs if net of mortgage or if no mortgage

Which share would your client rather have?

Spouse 1: Has to pay income taxes on the retirement accounts; and
Has to pay the expenses of running the house (e.g., taxes, utilities, maintenance, etc.)

Spouse 2: Has cash; and
Has the value of the private business, which may actually be higher than $1M

Therefore, if your client has large retirement accounts and the divorcing spouse is willing to take them at their “gross” value (not net of income taxes), then that’s a WIN for your client. If your client is the divorcing spouse receiving the retirement accounts, then you need to help adjust the value for the income tax consequences.

Qualified Domestic Relations Orders (QDRO) are used for transferring some or all of the participant’s retirement accounts to a divorcing spouse.
While we are on the subject of retirement accou

ts, it is important to recognize that for most clients (those that don’t own their own businesses) the largest asset in their estate will be their retirement accounts. No longer is their home the largest asset for most. If they want to make any charitable bequests at their death, these retirement accounts are the best asset to give. However, most charitable bequests are found in the Will, which does not control the distribution of retirement accounts. If you leave $X in your Will to charity, then the charity is receiving assets that would have had the benefit of stepped-up cost basis at your death and would have passed to your children free of income tax or capital gain tax (at the date of death value). Yet, these are the assets that you pass to the tax exempt charity. Then, you pass the same $X of retirement accounts to your children who are subject to paying income taxes when they take distributions.

Instead, consider establishing a separate IRA with charitable beneficiaries. Do not co-mingle IRAs with natural beneficiaries (people) and charitable beneficiaries. Otherwise, your natural beneficiaries lose the opportunity to “stretch” the required minimum distributions. Funds would have to be distributed within five years of the death of the participant.

If your clients want to keep their retirement accounts, then consider having sufficient life insurance to fund the income taxes on a Roth conversion at death. The participant, with any warning of his or her impending death, could convert the traditional IRA to a Roth IRA. The estate would have sufficient time to collect the death benefit proceeds to fund the income taxes. If the participant does not convert to a Roth during lifetime, but a spouse survives, the spouse can convert a spousal IRA rollover to a Roth and use the life insurance proceeds to pay the income taxes. If the participant does not convert to a Roth and there is no surviving spouse, an inherited IRA cannot convert to a Roth. But, at least the heirs have the life insurance proceeds to reimburse them for the income taxes when they take withdrawals. ♦